Tate cautioned on sucralose prices; Q3 results don't surprise

In a competitive sucralose market, Tate & Lyle should price the sweetener keenly to ensure significant market share in the future, claims an analyst as the group releases ‘reassuringly dull’ Q3 results today.

Martin Deboo, from Investec, told FoodNavigator.com that Tate though, in the main, tied into sucralose contracts with customers signed a few years back, should be careful not to set prices too high for the sweetener and thus open up the market to competitors - as had occurred previously, he notes, in the aspartame sector.

The sweetener was one of the hot topics on the agenda today during the conference call on food ingredient group Tate’s third quarter results, with the group saying sucralose volumes grew but below the particularly strong levels seen in the first half.

CEO Javed Ahmed reported a solid performance for the whole group in the quarter, which ended 31 December 2011.

He noted growth in the sucralose market but added that “despite press reports it is difficult to pinpoint any definite new global capacity. Our focus going forward is to ensure we don’t lose any contracts to competitors.”

Share performance hit

But Deboo said the cautious approach taken by Tate management regarding their expectations for the group’s FY12 has undermined the share performance.

Nevertheless, the analyst said the interim management statement was in line with market expectations.

“The moving parts seem to be pretty much as we anticipated and Tate remains on a steady course. But we sense some caution from management relative to our expectation that there was room for FY12/FY13 consensus upgrades.

So with the shares strong into the event, plus what we see as a demanding valuation, we anticipate a broadly neutral market reaction this morning,” said Deboo.

Rising sweetener margins in EU

The broker added that Tate, as expected, reported rising margins in liquid sweeteners in Europe - isoglucose and others - with these following the price of sugar upwards.

However, corn prices are reported as higher though Deboo said that Investec thought they were lower in Q3 on a spot basis, so “the profit upside here might not be as good as we thought.” He added that the weaker ethanol margins in the US would also curb growth.

“In line with our expectations and ADM's Q2 commentary, Tate report that margins in US ethanol contracted in December on the back of the removal of the 45c/gal blender tax credit. This will impact Tate's profits in Q4 FY12 and in FY13 if margins don't improve.

However Tate point out to us that, relative to our estimate of c100m gallons of annual ethanol production, they have the potential to lower their capacity down to a minimum level of 40 - 50m gallons to limit their exposure to these lower margins,” said Deboo.

Commodity price hedging 'limited'

CEO Ahmed mentioned various initiatives to offset commodity volatility such as cannibalizing bulk ingredients volume, and in Europe, the group said it continues to contract over shorter periods to mitigate corn cost volatility. Tate also reported that it had enhanced sweetener margins against a backdrop of higher sugar prices.

But the Investec analyst remained unconvinced about the ability of suppliers like Tate to really hedge against raw material volatility, particularly in relation to corn prices, which he said would be ‘limited.”

Indeed, the CEO said as much, claiming that its hedging had only really served to dampen Tate’s exposure to commodity price hikes.

Natural sweetener success

Ahmed also reported encouraging reception for its new monk fruit-derived Pure Fruit sweetener with beverage and dairy sectors the initial focus for applications.

“This is not about replacing sucralose, high fructose corn syrup or sugar,” cautioned the CEO in relation to a question from an analyst on it being a substitute for those sweeteners.

“Pure Fruit will be competing in the natural space,” said the CEO, who added that it would be premium product. “It is not about pricing the ingredient though. It is about pricing the solution,” said Ahmed, who explained that cost related to food or beverage category, the application and the level of technical expertise required in formulating thus with Pure Fruit.

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In a competitive sucralose market, Tate & Lyle should price the sweetener keenly to ensure significant market share in the future, claims an analyst as the group releases ‘reassuringly dull’ Q3 results today.